Authors: Milica Apostolovic (AECOM), Emily Le Cornu (AECOM), Eyerusalem Masale (CPI), Rebecca Maskrey (AECOM), Nina Schuler (AECOM), and Renard Teipelke (AECOM)

This Report explores the barriers, good practice lessons, and recommendations to improve local enabling conditions to attract private sector capital to support climate investments in cities of emerging economies. The analysis was informed by a literature review, five case studies with inputs from stakeholders involved in the projects’ development, eight key informant interviews, and feedback received from eleven technical experts.

Barriers to private urban climate investments can be found at the macro, city, and project levels. Recognizing interlinkages and interdependencies between different levels, two defining themes at the macro level concern (i) the macroeconomic context, and (ii) the institutional and policy context – both of which city governments have very limited means to influence. Barriers at the city level can be more directly influenced and overcome by city governments – with challenges found under the themes of (i) policy-making, planning, and capacity, and (ii) financial and asset management. At the project level, key barrier themes are (i) project design and structuring, and (ii) sector maturity and technology readiness – with city governments having some ability to overcome related challenges.

There is an increasing number of good practice cases where city governments have successfully accessed private sector finance for climate investments. Five case studies from emerging economies, covering different financing mechanisms and sectors, have been explored. In summary, key success factors include at (i) the macro level: clear and supportive policy and regulatory frameworks, (ii) the city level: transparent working practices accompanied by activities to reduce risks and enhance return on investments, and (iii) the project level: strong coordination and engagement of stakeholders, innovative implementation mechanisms to reduce high transaction costs, and pilot projects to prepare scaling up.

The report offers a set of recommendations to improve local enabling conditions targeting components including (i) systems (legal, regulatory, and policy environment), (ii) capacities (skills, experience, and personnel availability), (iii) resources (financial means, assets, and data), (iv) processes (steps, practices, and collaboration to plan, develop, and implement climate actions), and (v) mechanisms (implementation features and instruments to enable bankable climate investments). The recommendations can be summarized in a simplified way as follows:

• City governments to strengthen and streamline city planning, finance processes and capabilities towards improved project preparation. Prioritize climate investments where the private sector can propose solutions and city governments procure services (not ‘hardware’) to achieve climate impact
• Public Sector Partners:
  • National and state/provincial governments to provide policy direction and financial resources for subnational climate action, supported by standardized green finance and procurement instruments, as well as market-making incentives – maximizing the function of national development banks with an established corporate climate governance.
  • International finance institutions and climate funds to tailor instruments and support urban climate investments through programmatic interventions, focused on additionality and risk mitigation.
• Private and Third Sector Partners:
  • Financial entities (e.g. banks) to shift investment portfolios towards climate action, with more aggregation, co-investment in funds, and risk mitigation.
  • Non-financial entities (e.g. infrastructure companies) to propose climate project solutions for city governments through multi-stakeholder approaches.
  • Third sector entities (e.g. NGOs) to prioritize bespoke capacity development and provide innovation funding and test-beds, while supporting match-making.